Is The Gridlock Trade Dead Under Trump 2.0?

Three months before midterms widely expected to split Washington, one of Wall Street's oldest bits of election-season wisdom is getting a fresh look: the idea that gridlock is good for stocks.

The pitch resurfaces every two years. Fred Alger Management's October 2024 version was typical: since 1980, it told clients, the S&P 500 returned a median of 12% in the year after elections that split the White House and Congress, versus 7.6% when one party swept both. Divided government blocks big legislative change - tax hikes, new regulation - and that restraint supports valuations.

Then voters delivered the lower-returning scenario, a Republican sweep, and the market ripped anyway. The S&P 500 returned 19.9% in the 12 months through October 2025 and logged 46 record closes, roughly two and a half times the historical sweep median. It got there the hard way: a 19% plunge into an April 8 low of 4,982.77 as the tariffs rolled out, then a 37.8% rally off the bottom.

It's looking like the trade is about to receive a second test... On Polymarket, Democrats' odds of taking the House sat at 86% as of Aug. 1, with Republicans favored to hold the Senate - divided government, exactly what the old research likes. But the year between the two elections has scrambled the theory, and the industry's own research no longer agrees with it.

Divided government usually shows up at midterms, when the president's party tends to lose seats - and the S&P 500 hasn't fallen in the 12 months after any midterm since 1950, regardless of who won. 

Newer research has lots of caveats. A Royal Bank of Canada study back to 1953 found the weakest returns came under a Republican president facing a split or Democratic Congress - the exact setup now expected. BlackRock found that when a party loses unified control, stocks underperformed over the next six months, 10.4% versus 16.1%. Even Morgan Stanley has flipped: after arguing in 2022 that divided government props up stocks, its 2026 outlook waves off the election entirely, on the logic that the policies that move markets now come from the executive branch.

But a lot has changed since 2024. The gridlock theory assumes Congress is where policy risk originates, so a blocked Congress means policy stasis. This is no longer the case - because Trump has gone full leeroy jenkins with tariffs. 

And then there's this - Trump's little 'early access' operation that's sure to add volatility. 

Went live today

Trump will want them to be happy with their new serivce. So, expect more frequent market moving posts. https://t.co/em893BeV06

— Jim Bianco (@biancoresearch) August 1, 2026

Tarrific

On Feb. 20, the Supreme Court ruled 6-3 in Learning Resources, Inc. v. Trump that the International Emergency Economic Powers Act does not authorize the president to impose tariffs, with Chief Justice John Roberts writing that the Constitution assigns that power to "Congress alone." The administration terminated the IEEPA duties effective Feb. 24 - and replaced them the same day. Within hours of the ruling, the White House had invoked Section 122 of the Trade Act of 1974, a balance-of-payments provision invoked for the first time in its half-century on the books - the last comparable import surcharge dating to President Richard Nixon in 1971 - that caps any surcharge at 15% and 150 days; the administration set the rate at 10%. A federal trade court held that surcharge unlawful on May 7; an appeals court allowed collection to continue while the government appealed. In late July, the administration reached for a third authority, announcing 50% tariffs on Canadian goods under Section 338 of the Tariff Act of 1930, a Depression-era provision that Sen. Ron Wyden of Oregon said had rarely, if ever, been invoked. The Section 122 surcharge then expired at 12:01 a.m. on July 24 - its statutory limit, which only Congress could have extended, and Congress didn't act - and new Section 301 duties of 10% to 12.5%, covering 60 economies that account for more than 99% of U.S. imports, took effect the same minute, leaving no gap in collection. Importers filed two court challenges to the new duties the day they took effect.

The result: in the six months after the Supreme Court assigned tariff authority to Congress, the government's signature trade policy ran through four separate statutes without a single congressional vote. The legislative branch's main contribution came July 22, when Wyden, the Senate Finance Committee's top Democrat, introduced the Congressional Trade Powers Reform Act of 2026 - a bill that would repeal Sections 122 and 338 outright and require congressional approval for tariffs imposed under three other authorities. The fiscal aftermath is still being sorted: the Penn Wharton Budget Model projects as much as $175 billion in refunds of the struck-down duties, which had grown to about half of all customs receipts.

That's what matters for 2027. If tariffs - and much else - no longer run through Congress, a divided one can't deliver the stasis the gridlock trade is built on. A Democratic House would have subpoena power over the refund process, the votes to push Wyden-style trade bills, leverage over funding - the record 43-day shutdown of late 2025 happened under unified control - and a seat at the next debt-limit fight, which the Bipartisan Policy Center pegs for 2027. It would also focus fire on the market's most crowded trade: data-center moratoriums, which Raymond James flags as a rising Democratic priority aimed where the megacap-tech and chip valuations sit.

So after a year in which Trump's trade policy outlasted the Supreme Court, a trade-court loss, and its own expiration - across four statutes, without Congress voting once - what exactly would a divided Congress be able to stop?